The single currency's coming: we can no longer 'wait and see'

ByJohn Monks

12:00AM GMT 08 Jan 2001

THE strongest card in the Euro-sceptic hand is melting before our eyes. No longer can the euro be written off as a sickly currency. The American economy looks weaker each day and the only question now is whether its landing will be hard or soft. Back across the Atlantic, the euro is bouncing back. The European economy looks strong and the world's economic geometry is taking on a new shape.

This is bound to have an impact on British politics. The ability to attack the euro as a weak currency has always been a powerful shot in the Euro-sceptic locker. I do not underestimate their other arguments, but there can be no doubt, particularly at the tabloid end of the debate, that this has always been a powerful populist line.

It is a bit more complicated for the Government. On the one hand, it is committed in principle to joining and will therefore surely welcome this realignment as aiding that cause. On the other hand, all politicians like keeping their options open and pressure will inevitably grow on the Government after the election to show leadership on this issue early rather than late.

The currency realignment is also beginning to end one of the few points of agreement between sensible supporters of British entry into the euro and the Euro-sceptics. No one could have advocated entering the euro at the typical exchange rates of last year, as this would have had a disastrous impact on the UK economy and manufacturing in particular.

Much of manufacturing has been hit hard by the pound/euro exchange rate. Over half our exports of manufactured goods go to euro-zone countries, and three million jobs depend on this trade. More than 40,000 jobs were lost last year - with employers citing the exchange rate as at least one factor in the redundancies.

This is not to deny that the British economy has been doing exceptionally well. There have been eight years of growth. Unemployment remains low and inflation is running below target. A million jobs have been created in each of the past four years. But if you are trying to export into European markets, it is beside the point to argue about whether this is due to an overvalued pound or a weak euro. The conclusion is the same.

To have frozen for all time the acute competitive disadvantage suffered by British exporters in 2000 would have been high folly. Joining the euro at 2000 exchange rates was never a political runner. But this is now changing. There is still some way to go before we achieve a fully competitive pound, but the movement is now in the right direction.

This means that it is beginning to look as if any objective assessment carried out after the election of each of the Chancellor's five tests would produce five "Yeses" as the result. And, of course, we have met the formal Maastricht convergence criteria for such a long time that no one much bothers to mention them any more. It may be that pressure from well-known euro supporters such as myself for an early referendum will not be taken seriously. But there is likely to be a different kind of pressure on a new government to declare its hand after an election.

Up to now, the exchange rate issue and the euro's birth pangs have provided an important political space for the Government. It could happily support the principle but pursue a strategy that could be seen as either "prepare and decide", "wait and see" or even as a small incremental victory for euro-scepticism each day a referendum was postponed. Only those who oppose euro membership on principle for ever could find nothing of comfort in the Government's position.

But what if it is clear that the economic conditions are right, that the five tests would be met, and yet there is still no action? Then, we run a huge risk. If the world's boardrooms decide British membership of the euro has shifted from being a question of "when" to one of "whether", we will start to pay a much greater price.

Too many people delude themselves that inward investment in the United Kingdom is primarily due to our relatively deregulated labour market and low company tax regime. The truth is that our main advantage is as the English-speaking part of the single European market. But, as business leaders and the Government never tire of pointing out, what business most needs is stability. And stability has been about the last thing that anyone involved in exporting to our main overseas market has enjoyed in recent years, as the pound/euro rate has oscillated.

The result has been that some of Europe's most productive car and steel plants have run at a loss. The exchange rate moves of recent days have certainly been helpful to them, but there is no guarantee - short of joining the euro - that they are permanent.

If all the economic conditions were right, but still the British Government held back from starting the process of joining the euro, there is a danger that more multinational and British companies would say that they cannot run the risks of continuing exchange rate instability between the currency in which they pay their costs and the currency in which they get paid.

Politically, I have always taken the view that the alleged rifts between members of the Government about euro membership are wildly overstated. Such speculation is the product of a mix of wishful thinking and exaggeration of some genuine disagreements. These are not about principle, but about presentation and timing.

Euro-sceptics may be taking heart from a view that the currency realignments will push euro membership up the political agenda during the election campaign. Clearly, William Hague would prefer the election debate to be about the euro rather than the Government's economic record. At least some Labour strategists appear to want as low a profile as possible for the euro, and would probably have preferred it to recover during the second week of May.

My hunch is that they are both wrong, and while the euro will inevitably fascinate the media and political classes, it will not be as much of an issue among the voters who will decide the election. Perhaps about a quarter of voters strongly oppose the euro, but they are already mostly core Conservatives. On the other side, most convinced Europeans are already committed to Labour or the Liberal Democrats.

The rest of the electorate are far from enthusiastic at present but the euro is not that big an issue for them. It's not just the economy, stupid: public services, tax and crime all count as well. But all Labour has to do to neutralise the issue is to stress that it will offer the people the choice through a referendum, while the Conservatives will not. In any case, what voters will do when they get a vote on euro membership cannot be taken for granted. They already give comfort to both sides of the debate. They will happily tell pollsters one minute that they are not keen on the euro, but the next tell them they believe that membership is ultimately inevitable. Their hearts say no, but their heads may well say yes.

The Government's current position will therefore hold up to, and through, an election campaign. There will inevitably be a brief honeymoon if the polls are right and Labour wins with a convincing, if perhaps slightly smaller, majority. But pressure will soon mount after an election and it will not just be trade unionists and the usual euro suspects that will be expecting clear leadership from the Government. The world's boardrooms will also want to know where the United Kingdom stands. Some decisions cannot simply be postponed for ever - for that would be the same as saying no.